Time to end the waiting game

Analysis Like us, you might find it tough to take a company with "sharing" as its motto too seriously. Sun Microsystems, however, put on a very serious scowl at a Media Summit held at its Menlo Park offices last week. "Grrrr" was the message doled out by Sun staffers in between servings of lunch and birthday cake.

Summits often consist of dignitaries or politicos who try and push some new agenda forward while dissecting it from all possible angles. The Sun thing wasn't that kind of summit. Instead, it consisted of a lot of men and about two women, cramming their laptops full of notes, as a cavalcade of Sun executives made their way across the white board. CEO Scott McNealy, COO Jonathan Schwartz, GURU Andy Bechtolsheim, CTO Greg Papadopoulos, the Wall Street Journal, BusinessWeek, Fortune or Forbes - all there. Our invitation to the shindig only arrived two days before the actual event, which must have been a planning oversight. The other reporters had elegant Java cards outfitted with their very own names. We received but a humble guest pass. Life is hard at the top, and we've refused to let Sun's mind games get to us.

Along with lacking politicos, the summit failed to establish a new agenda. The Sun Brass stood firm behind two key positions. The company will not, as Wall Street demands, cut back on research and development spending or fire a bunch of workers. In addition, it will not back down from a strategy that - at times - addresses the future needs of customers more than their present concerns.

In case you can't tell, we're winding up for a "State of Sun" story - something we haven't done in quite awhile.

Let's start with the basics.

"We need some revenue growth," McNealy said, during the media brainwashing. "There is no question about that."

While Sun doesn't always present this as priority number one to the public, we think it ought to more often.

For the last few years, Sun has pitched a turnaround story full of vision but lacking product. It, for example, bought chip start-up Afara WebSystems back in 2002 to create a revolutionary line of processors meant to power a revolutionary line of servers. Then, it brought co-founder Andy Bechtolsheim back with the purchase of Kealia in 2004, paving the way for some revolutionary new Opteron-based gear. Along the way, Sun picked up a host of software start-ups, did a major overhaul of Solaris with Solaris 10, spent a fortune on StorageTek and pursued the whole open sourcing of heaps of code with vigor.

It's only in the last couple of months that Sun has delivered actual product to make use of all this fanfare. It turned the Afara work into the UltraSPARC T1 processor; it rolled out a first run of Opteron boxes; it boosted the performance of the UltraSPARC IV+ chip; it signed a price reduction deal with Oracle to stop immense database defections; it slapped a "free" sticker on every box of software; it got the StorageTek gear contributing to the bottom line; it finished refining most of the Solaris 10 features; and it got the ball rolling with interest around OpenSolaris.

The release of all this kit puts enormous pressure on Sun.

The Sun faithful in the analyst and press community have waited patiently to see a bottom line improvement. Yes, Sun generates cash every quarter and stashes the money away in its vault. Such gains, however, do not come close to offsetting constant losses in both revenue and market share.

The most faithful of the Sun faithful don't expect a huge revenue spike anytime soon. They do, however, expect the fresh lines of hardware and software to push Sun into the black on a consistent basis. A few cents per share in earnings per quarter will do for the moment.

Sun's Unix business continues to decline with it falling from first in revenue to third in 2005, which hurts the company's chances of building a solid earnings story. However, its x86 business continues to grow at pace and software shows signs of hope at times. Given that Sun has been sitting near break even in recent quarters, profits in the coming months are a very real possibility.

If Sun can't move into the black with the revamped product line, then it faces a much longer term turnaround story - one that will put its most ardent supporters to the test.

"Now it is up to us to execute and deliver revenue growth," McNealy said.

Damn straight.

Always betting on the future

A big part of the Sun's strategy continues to revolve around products that could pay off in the future.

A rather frank McNealy admitted that Sun realizes the vision talk is vision and that the company doesn't expect customers to move en masse to grids, thin clients, free software, open source chip architectures and the rest of what Sun calls its "participation age" program right now. Hearing this confession helped reassure us a bit. Sun often gives off the impression that current revenue relies on its vision of the future, and that seems a rather untenable position for a public company to hold.

To its credit, Sun lays out one of the more acceptable plans for moving technology forward - one we think most of the industry will adopt. Companies will not build or manage their own data centers in the future. Billions of internet connected devices will flood the network with all kinds of information. And - dare we say it - the thin client style of computing will eventually be the dominant technology for businesses and possibly consumers in poorer countries.

Sun insists that it's the only company that will be able to deliver all the back-, middle- and front-end technology for this grand future.

"It won't be IBM, HP or Dell," said CTO Papadopoulos.

We, however, suspect IBM, HP and Dell will have some role to play in computing's future. Call it a hunch.

Sun's real point is that it's the only infrastructure vendor spending billions on this vision right now.

The research and development spend at Sun has long horrified the brainiacs - and we use that term mockingly - on Wall Street. We happen to find Sun's penchant for experimentation endearing - as long as a payoff does arrive at some point. So, keep at it, boys.

The Bechtolsheim Effect

We continue to think analysts underestimate the effect Bechtolsheim's team will have on the x86 server market. Bechtolsheim has the most glorious track record imaginable from an engineering and investment standpoint. This man knows where markets are heading - see the original SUN workstation, Granite, Kealia, Google and VMware.

Sun has "dozens" of Opteron-based systems in the works, including an 8-socket system already shipping to select customers, blade servers and the Thumper dynamo.

"For the first time in years, there is real excitement in the industry standard server space," Bechtolsheim said. "I know the Intel camp is working overtime. I am not trying to pick on them. (But) the reason we are doing Opteron is because it's faster, it consumes less power and it's more scalable."

"In reality, we haven't seen one benchmark running faster on Intel than Opteron."

HP and IBM have made a decent Opteron investment, but they didn't have a chance to start from scratch the way Sun did. They have vast Xeon businesses to protect and must treat their Intel defection with caution. By contrast, Sun can repeat what it did 24 years ago (hence the birthday cake) and try and change the game.

In a perfect world, Bechtolsheim's fleet of Opteron boxes would have arrived about six months ago. Sun seems forever trapped by "huge company" delays when one might expect it to move a bit quicker than giants like IBM and HP. All that said, we have to believe Bechtolsheim will deliver some shockers this year.

Sun will only start generating serious profits if this Bechtolsheim gear sells well. The kit is key to Sun's immediate ambitions and to its goal of putting a thin client and OpenSolaris in every mud hut in Africa.